Newly introduced forign exchange(forex) policy of the Central Bank of Nigeria (CBN) has been tipped as responsible for strengthened liquidity freeze, hence financial institutions find it difficult to match Dollar for Naira following forex auction.
The report reflected that where CBN is the main supplier of FX in the market, means that growth and economic activities are fairly limited by the apex regulator’s capacity , a situation described as ‘handicap’ to an economy expected to be growing rapidly.
SBM Intelligence in its report, titled “the Dollar rain, a look at the forex market” noted that though the apex bank regulator, through the new forex policy , is genuinely selling foreign exchange to clear backlog, last week’s CBN auction when it supplied $500 million, banks could not take all the funds because of liquidity challenge.
The report noted that before 2015, CBN usually supplied about $300 million a week for auction at the interbank market. According to the report, demand for Dollar will soar in the summer period providing greater demand for dollar and more pressure on the Naira. “If the CBN is able to provide the extra supply in the official market then, rates could remain around current levels, if not the chase for naira’s true value will continue into the Ember months”.
Emphasizing that the new policy targets meeting specific demands, the intelligence report pointed out that CBN’s last forex auction caused speculators to sell off some of their dollar holdings and wait for the exchange rate to stabilise before taking further decision.
The report urged the apex bank regulator to take advantage of prevailing crucial opportunity to correct years of market controls which the bank has proven unable to sustain once the dollar supply is affected by events such as the drop in oil price.
It further noted that the policy controls, where CBN is the main supplier of FX in the market means that growth and economic activities are fairly limited by the CBN’s capacity, a situation which is a handicap to an economy that should ordinarily be growing rapidly.
“It is clear that the CBN cannot sustain this level of interventions for long. It will deplete its dollar supply and in the end achieve nothing significant,” SBM Intelligence said. “While we accept that a full float at this time, two years to elections will be politically imprudent, a policy approach that may work is to drive down the FX rate by the current oversupply, flush out speculators and follow up with a managed float to let the market determine the price without the added pressure of the speculators’ hoarding.”
